Net profit was down by 10% from previous quarter (excluding the 7.64 crores paid for 22m ECB). This was expected as the forward contracts were at 3500 USD per tonne vs 3300 USD per tonne in previous Quarter. They are hedged till March 2011, so the next Q should also be ok.

Natural rubber prices are now at 5000 USD per ton, what happens after March is going to be interesting to watch. Any raw material price increase will be passed on only with a lag effect.

I think there will be an opportunity to add more after March, we will see.

I think the results are good given the environment ofcontinuallyrising rubber prices. Other tyre cos have seen a fall of approx 75-90% in their Net Profits. While in the case of BKT....margins and profitability is still decent.

Management is confident of maintaining 18-19% EBITDA margins even in FY12, with rubber prices already over 5100 USD. Usually they hike prices once in 6 months, but given the unusual movement they feel another hike in Q1 FY12 will be necessary.

While BKT's EBITDA margins are at 18%, those of Michelin are at 7-8%. According to BKT, there is very little room for the majors to manoevre, and another price hike is imminent.Last hike by Michelin was by 8% , the same by BKT. Price differential is now at 30%. They will wait for a lead from the majors before the next hike.

Groundbreaking ceremony for Bhuj factory completed in january 2011. Construction will start. The greenfield expansion will be in place by start of Q3FY13.

I only wish that the management of mayur and ajanta made some kind of presentations like these.

Few observations and queries about BKT:

1). Regarding debt, they intend to incur capex of around 700 cr in fy 12. Now coming to ECB which seems to be their main source of funding, what kind of interest rate does ECB entail?

2). Another problem with BKT is that they have to rely on the biggies making the first move in hiking price. And with rubber prices spiralling , things could be dicey because although the company can partially pass some of the raw material price hikes, as can be seen from the last few quarters, the company does get hit due to raw material price volatility.

3). Is there any chance of the company facing some kind of anti-dumping duty or similar such move from overseas, which might impact demand?

4). My observation is that big capacity expansions by companies often run into rough weather for a few quarters for one or the other reason and this often reflects on share price.

5). On the plus side, the company intends to achieve USD 1 billion revenues by fy 15 which amounts to around 4500 crores turnover. Even if one were to assume a conservative NPM of around 8% then net profits could be in the region of 360 crores which would lead to eps of around 40 per share in fy 15. If things go according this calculations, the fy 15 discounting will start as early as half year of fy 15 i.e sep 2014 which is 3 years from now and one could assume price to triple from here to around 350-400 per share. This assumption is based on the view that comany will achieve its projected turnover and net profit margins would be around 8%.

Thanks for the pointer to investor presentation Hitesh. There will be a conf call today at 4 pm, should be good to dial in.

1) The interest rate is LIBOR + 0.5% pa, currently at 3.5%

2) Yes, the majors will have the wherewithal to absorb any price hikes for a short duration. Ultimately, the cost disadvantage will make it necessary. From the presentation, although the natural rubber prices increased by 50% in 2010, only 25% was passed onto customers. It also looks like they extended the forward contracts till May 2011. At what prices ? Hopefully, the mgmt will cover this in today's call.

3) From what I hear, the anti-dumping duty was on the Chinese in the auto sector (a 100B market). Considering the relatively smaller market (10B) for OHT and Titan being the major player, I consider it unlikely. But anything is possible

4) I hate paying for growth, I love cheap companies where the growth is not factored in. Any DCF analysis with aggressive growth is a pie in the sky. Analysts are predicting 30% CAGR growth in next 3 years due to the expansion, I don't see that happening. With a conservative 10% growth, over the long term (3-4 yrs) I think BKT is still cheap.

If I remember correctly, they have locked in prices at $3800 per tonne till May. Post that will be interesting to see what happens as upward price movement has not ceased, with current prices going over $5100.

only wish that the management of mayur and ajanta made some kind of presentations like observations and queries about Regarding debt, they intend to incur capex of around 700 cr in fy 12. Now coming to ECB which seems to be their main source of funding, what kind of interest rate does ECB Another problem with BKT is that they have to rely on the biggies making the first move in hiking price. And with rubber prices spiralling , things could be dicey because although the company can partially pass some of the raw material price hikes, as can be seen from the last few quarters, the company does get hit due to raw material price Is there any chance of the company facing some kind of anti-dumping duty or similar such move from overseas, which might impact My observation is that big capacity expansions by companies often run into rough weather for a few quarters for one or the other reason and this often reflects on share On the plus side, the company intends to achieve USD 1 billion revenues by fy 15 which amounts to around 4500 crores turnover. Even if one were to assume a conservative NPM of around 8% then net profits could be in the region of 360 crores which would lead to eps of around 40 per share in fy 15. If things go according this calculations, the fy 15 discounting will start as early as half year of fy 15 i.e sep 2014 which is 3 years from now and one could assume price to triple from here to around 350-400 per share. This assumption is based on the view that comany will achieve its projected turnover and net profit margins would be around

**

Hi Hitesh and Others

I studied Balkrishna in 2009 and I agree to all what has been said by various guys on this forum. However I have some concerns on the competitive scenario. There seems to be emerging competition for this company:

)- Chinese companies are starting

)- There is 1 Indian company (ex-employee of Balkrishna) who has got venture capital funding and starting a new project on similar lines.

Being a niche field and if some competition emerges would not be good. Price war is likely.

See attached documents. Would like to have your perspectives on this.

Check Google for off-highway tyres for china companies emerging in this field

I have been reading on BKT since 2008 and have been an investor since 2009 start. As per my understanding, Yogesh Mahansaria (and their family) were key promoters of BKT earlier. It seems Poddars bought them out, to gain full control. Yes, Mahansaria's might have been technically better people but look at the nos since then (I think separation happened in 2005-06) - The Poddars have scaled up the co from about 600 Cr turnover to approx. 1850 Cr+ turnover this year. All in 6 years!!. So to their credit they have already done well and now seem to be on track for $1 Bln turnover target.

Till now the margins are broadly intact.

If one looks at the broader picture worldwide, then the niche in this business is due to high labour cost and easier and cheaper access to rubber in Asian Countries. Add to it the expertise needed to maintain SKUs and maintain quality.

BKT is already operating at double the margins to most of the competitors in developed countries and has been gaining market share. So it seems that there is enough space for both BKT and alliance.

Regarding competition from Chinese players, what I have read is that they are more present in low end tires and their quality is not good. BKT is now among top 5 brands in Europe and fast gaining presence in America.

thanks for reply. It is quite insightful. Several times in the past 2 years I have decided to enter into BKT but desisted from doing so.

1) have you got any information on whether the alliance NEW PLANT in India is operational or not? one of the major goal ofMahansaria was to buyout alliance and lower the cost by producing in india by setting up a greenfield project. Is it in operation now?

2) Second thing is that when an insider leaves he targets the same clientele - in this case BKT clientele.

3) Can you educate me what is the MOAT of BKT (like buffet defines). Does BKT have any pricing power? What prevents competitors from eating marketshare of BKT?

4) regarding chinese do you have any weblink or document which tells their quality is poor?

2). Yes, competition will surely come up. But the way I'm looking at the opportunity is - currently BKT is having just a 3% market share globally and we don't have any other co doing a similar business from India at this scale. So that leaves enough space for two players to exist.

3). I think the MOAT could be managing of SKUs and building up of a recognized brand (comparable to top players) over last few years. Regarding pricing power - though it may not be there but it has high margins and hence much better placed to competitors.

111545 MT growth of 32% over FY10. US market penetration has gone up. Demand is strong in other markets as well. 44% hikes in revenues. orderbook of 60500 MT =5.5 month of sales

current achievable production capacity is 126000; 140000 capacity by Sep 2011.130 cr capex in FY11. Greenfield expansion at Buch progressing. construction started , machines are being ordered. Will be in place by H2 FY13. Total achievable capacity will go up to 230000 MT.

50 cr long term debt. Rest 540 Cr is working capital of total 600 Cr debt position. working capital borrowings at foreign currency. So overall cost of financing is more like 2%

Geographical spread

FY10 51% EU; FY11 47%

FY10 19% America; FY11 23%

FY10 17% Asia; flat FY11

FY10 13% RoW; flat FY11

Indian market?

FY10 11%; flat in FY 11

any new OEM wins?

No. This is primarily because of capacity constraints. Once Buch facility comes up, we will be able to address that.

OEMS. Distributors, Off-take

15%, 75%, 10%; Roughly the same distribution in FY11

any new OEMS? None. again because of capacity constraints.

Competitors in US Titan and Goodyear. Apart from these there is Michelin in Europe plus 2 others

Competitive Edge

Its a difficult business; low volume high no of SKUs, complexity; Quality and After sales Service, Warranty.presence in over 120 countries, good geographical mix.The Chinese are masters of volume game, not complexity.

Any chance of anti-dumping duty imposed in US like for teh Chinese?

Chinese were dumping at below cost. We are a profitable company our BS will show that. Dont think there is any chance of anti-dumping case on us.

He informs we can track Conf call schedules updated at this site ResearchBytes

Forward contracts are on a rolling basis. this qr was at 3800; coming qr if I remember correctly is hedged at current levels only i.e 5100-5200. But the good thing is they have orders booked for 5.5 months vis-a-vis these rates, and they expect prices to come down.

Ayush- you may have the correct info? I did not note these things down.

I don't think they are getting too much into long term rubber hedging contracts. What they do is - as they have order books for next 4-5 months, they take rubber contracts at the time of orders. It seemed from the talk of the mgmt that the orders book is sort of fixed price....hence margins may be steady for coming qtrs.

What they did say was they do simple forward hedging, on a rolling basis. They are covered for a quarter in advance. I also got the sense that they said they book orders at a fixed price (prevailing at the time of booking), so margins are protected for these orders. Incase the rubber prices come down, like they mentioned they expect, there may be upsides.

Please explain to us the current demand-supply situation in Agricultural Tires, and OTR Tires segments. Is demand running far ahead of supplies? What makes for this aggressive expansion of over 80% from current levels? How have you planned for increasing Sales in tandem, or is that a given? What are the risks according to you?

2). ****Premium Products. Agri Radial and OTR Radials. BKT is the largest manufacturer of full range of radial tractor tires from Asia.

How much of the post-expansion capacity is planned for premium products like Agri Radials and OTR Radials? What is the revenue contribution from Premium products currently and is there going to be increasing focus on premium segments?

3). ****Off-take from Global majors like Michelin and Vredestein currently forms 6% of total Sales.

With large capacities available from BKT especially in premium segments, do you foresee greater interest from Global majors in increasing off-takes from BKT. We know that OEM market margins are lower than the Replacement market, but how are the margins in the Off-take segment?

4). ****Indian Market share currently forms 11% of Sales and most of it comes from OTR sales. The Indian Earthmoving and Construction Equipment industry is meanwhile expected to grow five fold from USD 2.3 billion to USD 12 â13 billion by 2015.

Would we see an increasing focus on the Indian OTR tires segment once you do not have any constraints on the capacity front? Who are the existing players in this market âsame Michelin, Titan, or there are others? What are their market shares, and how far behind is BKT.

5). ****Global competition. Michelin. Titan. Other players like Alliance from developing markets having similar advantages as BKT have emerged on the scene too.

Michelin 2008 Investor Presentation listed BKT as serious competition in Europe and showed BKTâs share as 3%. Kindly explain what has changed in the last few years. Do you still enjoy the 30% price differential? If there is a demand-supply mismatch situation, the bigger players also must have invested in creating larger capacities?

Mehensarias have a strong technical background, they have the Capital backing them up, the benefit of the BKT experience till 2005/6, and have lined up substantial capacities by now, and may well replicate most of the advantages that BKT today enjoys. How closely do you track local competition? Any changes in tactics/plans to tackle this emerging threat.

The new entrants in a bid to capture greater market share faster may resort to undercutting? Is that not a real threat?

Tell us a little more on the penetration that you are making in your fastest growing markets, especially the Americas. Which of these markets will provide you most of the sales growth? Are you able to get similar margins form the South American growing markets?

7). ****In FY11 BKT registered an impressive 40% plus growth in Sales, but suffered an 11% degrowth on PAT front due to the reversal in raw materials pricing.

How do you see FY12 panning out? You mentioned order booking of 5 months in the last Conference call. Are you protected on the margins front in booked orders? At what levels 18-20%? What is a sustainable level for the full year?

If prices are expected to soften in coming months, how are booking your current orders?

8). ****Financial Strength. BKT has always maintained prudent debt levels in the range of 0.7x to 1.3x. Capex for FY12 of ~700 Cr is going to be a bigger burden on the balance sheet this year.

We may see Debt-to-Equity levels touching 1.5x or so. Please tell us a little more on the financing costs. Working Capital/ Sales has risen to over 32% of Sales, and is likely to go further up as inventory levels go higher. Is Working Capital also financed in foreign currency? What will be the overall financing cost? Will it be lower than your traditional 4-5%?

9). ****European economy is troubled. The current bailout to Greece may not be enough and there are fears this may lead to more such bailouts for Greece and the other countries like Ireland, Spain too. The Euro as a currency is under tremendous pressure. BKT derives ~47% of revenues from Europe.

What are BKTâs views on the risks from this front and what are its plans to mitigate these risks?

10.****Exports account for ~90% of Sales. More than 70% exports are to developed markets.

How soon will emerging economies together account for something like 40-50% of Sales? What are BKTs views on entering the Chinese market?

11.****Sustainable Competitive Advantage. We have seen BKT holding its advantage through the last 10 years and growing more than 10x in the same time in size.

What are the reasons you have continued to enjoy competitive advantages and have not faced serious threats from emerging or bigger players?

If we look at tractor tyres in India we see mostly MRF or Goodyear. Why has MRF for example not found it profitable to compete with you in exports for Agricultural tires? Itâs not that MRF or Apollo or any of the tire biggies in India arenât aware that BKT operates at something like 2x their margins and returns!

Why has no one from the mainstream tire industry ventured out in off-highway tires in a big way despite clearly seeing a decade long growth story unfolding before them?

And for the first time there is hint of serious competition coming from players like Alliance who seem to be capable of replicating the same advantages as BKT. Why do you think you will retain sustaqinable competitive advantages for the next 5 years?

12.****Manufacturing Plants & Automation

The modern fully automated plant at Chopanki (60000 MTPA) is reportedly delivering 110 TPD at 75-80% utilization. Both the plants are functioning on three shifts per day on a 7 day week. But your Bhiwadi plant (60000 MTPA) is over 18 years old and reportedly still delivers about 135-140 TPD close to 100% achievable capacity. Is this true??

This is an amazing record and speaks well of Managementâs ability to maintain its plants and progressive de-bottlenecking. It also indicates maneuverability and the expertise of the company to implement a complex manufacturing process and switching it flexibily to accommodate client specific requests.

This must be another source of competitive advantage? Please elaborate on this aspect a little for our benefit.

13). Mould Division Merger

BKT reportedly has 500-600 moulds used for various applications in varying sizes and designs laid in these two plants, all manufactured at BKTâs mould manufacturing plant at Dombivali, Maharashtra. This division is now being merged with BKT?

Kindly tell us a bit more on the advantages of having your own mould manufacturing plant. And why this decision now to merge it with BKT?

13.****Dividend Policy.

BKT used to be paying above 20% of earnings as dividend to shareholders. This has been gradually coming down and has seen drastic cuts in the last 2 years. FY10 dividend payout was at 6,.48% and FY11 is even lower

Can you please clarify the Managements thinking on this front? What kind of dividends can we expect in the future?

**14.****$1 Bn in Sales? **

What are the important milestones on the way? With a Sales target of 130000- 135000 MTPA fro FY12 we are probably doing ~2300-2400 Cr in Sales?

With 230,000 MTPA achievable capacity from 2HFY13, what kind of Sales is probable in FY13? 3300-3500n Crs?

What kind of market share will this transalate to for BKT? When will we see BKT claiming a 10% market share in the global off-highway tires market?

15.****Challenges Ahead. We have tried to cover the issues before the company as we see it from our limited understanding of BKT and the Industry.

Please elaborate on the main challenges before the company as it is scaling up in a big way and trying to address the huge opportunities before it.

Guys please keep putting up your hands in such exercises - they are intense and force you to look at the company over several years from many angles - Ayush told me something which I really liked that I am sharing here - that a picture of the company forms in your mind. So when you go to meet Management - you are actually going there to cross-check your version of that picture with what youadditionallylearn and see from management.

If you don't have a well-formed picture in yr mind a) you cannot extract as much and b) every small that you know and can ask follow up questions with enables Management to talk more freely and expound on something c) Otherwiseyou will end up lapping down whatever Management is telling you.

Think about this and keep participating more in such excercises in whatever manner you can. Every addition angle or question can be important!